Active managers ‘fail to beat inflation’: Mercer investment survey

Mercer’s investment performance survey shows the median active manager failed to yield real returns, even if it beat the benchmark.

Mercer’s closely watched investment performance rankings show the median active fund manager matched the Australian shares benchmark in the March quarter, but the returns did not beat inflation for the year.

After delivering double-digit returns the previous quarter, the median fund gained 3.3 per cent before fees in the three months to March 31, according to the latest Mercer investment survey. That matched the S&P/ASX 300 Total Return index.

During the year, however, the average manager failed to produce real returns, achieving gains of only 0.4 per cent, well below the 7 per cent inflation rate. The index retreated 0.6 per cent over that ­period.

The top four funds – Lazard ­Select Australia Equity, Merlon Concentrated Value Strategy, Katana Australian Equity Fund, and Australian Eagle Long Short – were the exception, achieving ­returns from 11.4 per cent to 9.3 per cent for the year.

Rounding out the top 10 were Lazard Aus Equity, Perpetual Share Plus Long-Short, Investors Mutual Equity Income, Investors Mutual Concentrated Australian Shares, and Lazard Australian ­Equity, achieving returns between 6.8 per cent to 1.3 per cent.

Managers in the lower quartile returned 2.1 per cent in the quarter and lost 2 per cent in the year.

“Given the volatility we’ve seen in equity markets over the past year, the significant divergence between the top and bottom performing strategies is not surprising,” Mercer Asia-Pacific portfolio manager Shannon ­Reilly said.

Expectations that global inflation had peaked and was beginning to moderate dominated in the March quarter, leading to a ­resurgence in the performance of growth-oriented investment strategies, Mr Reilly said.

“Despite this, the top performing funds over the last 12 months remain those where valuation ­appears to be prominent in their investment thesis, or where dividends/income play a role in return generation,” he said.

The median return from income-oriented managers over three years was 17.2 per cent, the second-highest yielding strategy over that period, coming below long-short managers, who yielded a median 22.3 per cent. That was also the highest median return of any strategy over all surveyed ­periods, which also includes five-year performance.

Auscap Long Short Australian Equities, run by Tim Carleton, took the top spot for the strategy, skewing the result with gains of 45 per cent. Over the past 12 months, however, the fund lost 5.3 per cent, when the median fund in that strategy fell 0.5 per cent. The fund is heavily skewed towards companies in the consumer discretionary, financials and communication services sectors.

Its top holdings – accounting for about 80 per cent of the portfolio – included Breville, JB Hi-Fi, Nick Scali, Macquarie, Westpac and Telstra, according to its latest quarterly report. It closed all its short positions during the quarter, the document shows.

Mercer’s survey shows that funds pursing target-volatility strategies, where managers define a level of risk for the portfolio and rebalance it in order to achieve that, scored a median return of 1.5 per cent.

Funds in the socially responsible investment cohort lost 3.3 per cent, while enhanced index funds yielded a median 1.2 per cent.